Volume 32, Issue 4 e12224
RESEARCH ARTICLE
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A point-input, point-output forest as a microprototype for capital accounting

Robert D. Cairns

Corresponding Author

Robert D. Cairns

Department of Economics and Cireq, McGill University, Montreal, Canada

Correspondence Robert D. Cairns, Department of Economics and Cireq, McGill University, Montreal, QC H4X 1R4, Canada. Email: robert.cairns@mcgill.ca

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First published: 24 June 2019

Abstract

The point-input, point-output, plantation forest was first studied by Martin Faustmann in the mid-19th century. The exploitation of a Faustmannian forest involves decisions concerning investments and receipts over time that are qualitatively different from the smooth, convex flows that are usually studied in the economics of accounting. The simple, well understood analysis of the forest has implications for the concept of income in forestry as well as in other industries that are typified by nonconvex decisions. A forest is a salient example of the importance of discrete, irreversible investment, and of the role of price effects (capital gains) in income accounting and, more fundamentally, of perceptions of the “right prices” in economic analysis.

Recommendations

  • Faustmann’s model of forest provides insights for determining the “right prices” (green accounting) for forest evaluation and management as well as other industries.

  • The decisions of the forester are lumpy and nonconvex, in contrast to many applications of green accounting.

  • If conditions are nonstationary, as in reality, capital gains or losses arise over a rotation period.

  • The capital gains or losses are integral to decisions and hence to correct economic accounting.

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